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The chart below provides a side-by-side comparison of the different low-risk investment options available.
| INVESTMENT OPTIONS | Advantages | Disadvantages | Best Current Interest Rate* | Minimum Deposit | Risk to Principal / Insurance | Tax Attributes |
| Online savings or money market accounts | Most accounts require only $1; very liquid | Transaction costs; no guarantee of rate stability if short term rates decline | As high as 4.00%. | Varies. Often $1; many accounts require larger deposits | At FDIC- insured banks, total principal amounts below $100,000 for single accounts or $200,000 for joint accounts (including savings, checking, CDs, etc.) in each ownership form in that institution are secure. | Fully taxable in the year of accrual |
| Fully Taxable Money market funds | Usually very liquid | Rates have not been very competitive with alternatives; yields may not rise as quickly as some alternatives if short term rates rise. | Retail funds as high as 3.48% over last week (institutional funds as high as 4.19%) | Ordinarily between $1,000 and $3,000, although sometimes as low as $1 | Although very rare, principal invested may fall below par; not insured | Fully taxable in the year of accrual |
| Tax-Free Money Market Funds | Usually very liquid; most beneficial to those in the higher federal and state tax brackets | If tax advantages are not fully utilized, the effective return is below that of fully taxable alternatives | Approximately 2.00% to 2.75% which for investors in the highest federal tax bracket (35%) who are residents of high taxing states may be equivalent to a fully taxable yield above 3.50%. | Ordinarily $3,000, although sometimes as low as $1 | Although very rare, principal invested may fall below par; not insured | Fully tax free provided that you are a resident of the appropriate state for the entire year |
| Short Term Certificates of Deposit | Provides a guarantee of income should short term rates fall | Not liquid for term of CD (without significant penalty); current 3 month rates are just below the best online savings accounts | APY rates may be slightly higher than online savings accounts for terms over 6 months | Usually around $2,000 although larger deposits will often get slightly better yields | At FDIC-insured banks, total principal amounts below $100,000 for single accounts or $200,000 for joint accounts (including savings, checking, CDs, etc.) in each ownership form in that institution are secure. | Fully taxable in the year of payment, not accrual |
| US Treasury Securities | Very liquid | May decline in value | Differs according to duration | $1000 | No risk to principal if held to maturity; backed by US Full Faith and Credit; may trade at values significantly below par before maturity | Not subject to state and local tax. |
| Series I Bonds | Very high yields; strong protection against inflation even where short term interest rates do not rise | Absolutely not liquid for 1 year; penalty of 3 month interest forfeiture if redeemed in fewer than five | 4.84% through October 2008, reset bi-annually based on CPI-U thereafter | $50; maximum purchase is $10,000 per calendar year per individual | No risk to principal; backed by US Full Faith and Credit | Not taxable at state level; Federal tax is deferred until redemption |
| Treasury Inflation Protected Securities | Like all US Treasuries (except I Bonds), very liquid; strong protection against inflation due to link to CPI-U | May lose value if interest rates rise and inflation (as reflected in the CPI-U) does not rise as quickly | Approximately 2.30% on the 10-year TIPS | $1000 | No risk to principal if held to maturity; backed by US Full Faith and Credit; may trade at values significantly below par before maturity | Interest is fully taxable in the year in which it is paid. Phantom interest is taxable in the year in which the bond's principal appreciates in accordance with changes in CPI-U. |
| Agency Bonds | Usually very liquid. Benefits are greater for those in highest tax brackets of highest taxing states. Callable agencies may offer a substantial yield premium over other short term securities | Longer term agency bonds may lose value very quickly if interest rates rise and bonds are not called | One-year Federal Home Loan Bank notes currently yield 3.50% and are state and local tax free. | Usually sold in $5,000 increments | Risk to principal may exist; may trade at values significantly below par before maturity | Certain agency bonds are not taxable at the state level; interest is Federally taxable in the year that it is paid |
| Municipal Bonds | Usually very liquid; yields often exceed after tax yields for taxable bonds and cash equivalents for investors in higher tax brackets | Even the shortest term bonds may lose value if interest rates rise | Short term (3 to 6 month) rates are around 3.00% | Usually $5,000 | Risk to principal may exist (mitigated where bonds are insured by triple-A rated insurers); may trade at values signficantly below par before maturity | Usually not federally taxable, and usually state tax free to state residents |
| Auction Rate Securities | Very liquid as presumably can be redeemed (not renewed) any week; however, at current some auction rate securities, particularly those related to Master Limited Partnerships are not liquid. | Little stability in rates as they change on the auction date each week | Current rates are anywhere between 3% and 5% (the higher end being on failed auctions that are renewed at default rates (holders are illiquid) | Usually $25,000 | Risk to principal exists; securities are secured only by assets of issuer. | Fully taxable, unless secured by pools of municipal bonds |
| Variable Rate Demand Notes | Combines the advantages of municipal bonds and auction rate securities | Same as auction rate securities | Similar to auction rate securities. | Usually $100,000 | Risk to principal exists; securities are secured only by assets of issuer | Same as municipal bonds |
| Commercial Paper Accounts | May be operated similar to online savings accounts | Not insured, significant credit risk is borne | Competitive with online banks APY for deposits over $50,000. | Due to graduated scale, rates are ordinarily only interesting for deposits over $15,000 | Significant risk to principal exists; securities are an unsecured liability of issuer | Fully taxable in year of accrual |
| Federal Credit Union Accounts | May be operated similar to online savings accounts or CDs | Often difficult to find a FCU for which you qualify with the products you want | Depends on particular FCU and duration | Varies, but often as low as $1 | Not FDIC Insured. Insured by NCUSIF; banking lobby argues that there is more risk to principal than FDIC-insured products | Savings accounts are fully taxable in year of accrual and CD products are fully taxable in year of payment |
* Since APY (see definition in the Financial
Terminology section) assume interest compounding
over the course of 365 days, the comparative rate for
non-bank or FCU-issued products (all products other
than savings and CD products) would ordinarily be between
10 and 15 basis points (0.10% to 0.15%) higher, depending
on the frequency of interest payments or accrual in
those non-bank or FCU-issued products.
